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Testamentary trusts — an overview of the tax benefits

There are income tax and capital gains tax advantages of distributing assets through a testamentary trust. This article summarises those advantages.

Andrew Wright

Estate Planning

What is a testamentary trust?

A testamentary trust is a trust established under a valid will. A testamentary trust functions in a similar way to a discretionary family trust, with
certain provisions of the will operating like a trust deed.

You can read a Clearlaw article on the testamentary trust structure generally and its benefits here.

What are the income tax benefits of using a testamentary trust?

As a form of discretionary trust, a testamentary trust has the significant advantage of enabling the trustee to stream or split income amongst the trust's
discretionary beneficiaries in a way that minimises overall tax paid on the trust's income.

The trustee may decide which beneficiaries receive trust income. The beneficiaries that receive the trust income then include this income in their own
assessable income which is taxed at that individual's marginal tax rates.

A trustee is able to minimise the overall tax paid on the trust's income by streaming income to beneficiaries with low marginal tax rates.

With the current tax free threshold of $18,200, beneficiaries are potentially able to receive up to $18,200 of tax free income from the testamentary trust
each year.

This is especially relevant for beneficiaries of the testamentary trust who are children (that is, minors under the age of 18) given that children
generally do not have any other income and can therefore make full use of the tax free threshold.

In contrast, income received by children from a family trust is subject to penalty tax rates.[1]

What are the capital gains tax benefits of using a testamentary trust?

When a CGT asset passes from a legal personal representative of an estate (that is, the executor) to a beneficiary of a will, any capital gain made by the
legal personal representative is disregarded.[2]

Although there is no similar rule in relation to CGT assets passing from a trustee of a testamentary trust to a beneficiary, the Australian Taxation Office
has stated that it will not depart from its longstanding practice of treating the trustee of a testamentary trust in the same way as an executor. [3]

This means that any capital gain made by a trustee of a testamentary trust from a CGT asset passing to a beneficiary of the trust will be disregarded.

For example, if land held in a testamentary trust passes to a beneficiary of the trust, the capital gain that arises on the disposal of that land by the
trustee is disregarded as a result of the ATO applying the above policy. CGT is not assessed until the beneficiary disposes of the asset.

Furthermore, and similar to income of the testamentary trust, any capital gains from the sale of CGT assets can also be minimised by streaming these
capital gains to beneficiaries of the testamentary trust with low marginal tax rates.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Tax and Revenue or General Commercial teams.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of estate planning topics here.

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direct and indirect tax advice on structuring of businesses and transactions;

mergers and acquisitions;

corporate reorganisations;

sale of businesses;

joint ventures;

property developments;

succession planning; and

liquidations.

Anna's clientele has been predominately made up of small to medium enterprises ranging from information technology to property developers, private education providers, accountants and financial advisors.

Prior to joining Maddocks in 2006, Anna worked at Ambry Legal practising in tax and commercial law.

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